5 Stocks Setting Up to Break Out - views

WINDERMERE, Fla. (Stockpickr) -- U.S. stocks are trending lower today after a disappointing reading on U.S. consumer confidence kept buyers at bay who were initially bullish on hopes for a European Union pact on their sovereign debt problems.

The Conference Board’s index of U.S. consumer confidence in January hit 61.1 from a revised 64.8 in December, which is well below the 68.0 reading that Wall Street analysts’ were expecting.

At last check, the Dow Jones Industrial Average was trading lower by 54 points and the S&P 500 was off by around 4 points. The tech-heavy Nasdaq was trending down 6 points. Despite the weakness in equity markets today, all three major index are trading within range of some major breakout levels. For the Dow, that level is 12,841.95, and for the S&P 500, it sits at 1333.47. The key technical breakout level for the Nasdaq is 2834.30.

If all three of the major indices break out soon, then we’re going to see many sectors and stocks breakout and trade significantly higher. The shorts who have been betting against this market recently will help to fuel the move higher as they cover some of their positions. Being short a market or stock that’s breaking out is rarely a good idea, since the breakout often leads to much higher prices.

Trading breakouts is not a new game on Wall Street. This strategy has been mastered by legendary traders such as William O’Neal, Stan Weinstein and Nicolas Darvas. These pros know that once a stock starts to break out above past resistance levels, and hold above those breakout prices, then it can easily trend significantly higher.

One stock that’s starting to trigger a major breakout trade today is Apple (AAPL). This company’s products and services include iPhone, iPad, Mac, iPod, Apple TV, a portfolio of consumer and professional software applications, the iOS and Mac OS X operating systems, iCloud, and a range of accessory, service and support offerings. This stock is off to a hot start in 2012, with shares up over 12%.

If you take a look at the chart for Apple, you’ll notice that this stock gapped up big after reporting monster earnings last week, from around $420 to just over $454 a share. After gapping up, shares of Apple pulled back a bit but managed to hold right around the gap day’s low and find some buying support. Now the stock has started to breakout above its gap day’s high, which is bullish price action.

Market players should now watch for AAPL to sustain a high-volume move or close above $454.50 and $460 a share (after hours high following earnings) on heavy volume. A high-volume move or close above those levels will trigger a major breakout for AAPL since it will push this stock into all-time-high territory. This will mean that anyone who has ever bought the stock is making money, and it will mean that anyone who is short is losing money. Look for volume that’s near or well above its three-month average action of 12.7 million shares.

You could be a buyer of APPL off any weakness and simply anticipate the move over $460 a share. I am looking for a quick pop in AAPL here, so I would use a tight mental stop at around $450 a share, or just below the gap up day’s low price of $443.37. With end of the month markup here, AAPL has a good chance of ripping 20 points or higher if the $460 breakout level is taken out.

One stock that’s trading right below a couple of key technical breakout levels is KiOR (KIOR), a renewable fuels company that has developed a technology platform to convert non-food biomass into hydrocarbon-based oil. This stock is blazing a trail so far in 2012, with shares up over 19%.

If you look at the chart for KiOR, you’ll notice that the bears dismantled this stock from its late November high of $18.39 to a recent low of just $8.67 a share. After printing that low, the stock found some big buying support right around $9 a share, and since then it has rallied strong to its current price of just over $12 a share. This rally has moved KIOR back above its 50-day moving average of $11.94, and it now puts the stock within range of a number of key breakout levels.

Traders should put KIOR on their radar for a breakout trade if this stock can manage to clear some near-term overhead resistance at $13.19 and $13.50 with heavy volume. Look for volume on any move above those levels that’s near or well above its three-month average action of 77,521 shares. If we get that action, then this stock has a great chance to make a run at that late December high of $18.39.

You could be a buyer of KIOR off any weakness and simply anticipate the breakout. I would use a mental stop that’s a few percentage points below the 50-day if you buy off weakness. You could also buy off strength and get long once $13.19 is taken out with volume, and then add above $13.50 a share.

This is another breakout candidate with a large amount of bears involved in the stock. The current short interest for KIOR stands at 12.4% of its tradable float. That high short interest, combined with the stock’s low 16.10 million float, makes it an awesome short-squeeze candidate if we get that breakout soon.

A stock in the biotechnology and drugs complex that’s nearing a big breakout is Halozyme Therapeutics (HALO), a biopharmaceutical company developing and commercializing products targeting the extracellular matrix for the diabetes, cancer, dermatology and drug delivery markets. This stock is out the gate strong in 2102, with shares up over 11%.

If you look at the chart for Halozyme Therapeutics, you’ll see that stock has been uptrending strong since it found big buying support back in October at around $5.60 a share. During the recent uptrend, this stock has been consistently making higher lows and higher highs, which is bullish price action. Now the stock is rapidly approaching a big breakout if it can manage to clear some near-term overhead resistance.

Market players should put HALO on their trading radar for a sustained high-volume move and close above $10.88 to $11 a share. Look for volume that registers near or above its three-month average action of 633,324 shares. At last check, HALO hit $11 a share today and the volume is just 100,000 shares short of that average action. I would consider any high-volume move over $10.88 to $11 a share to be very bullish since it will push HALO into all-time high territory. Momentum money could easily pile into this stock off a high-volume close over $11.

You could simply be a buyer of HALO once it closes over $10.88 to $11 a share with volume. I would simply use a mental stop that’s a few percentage points below $10.88 in case the breakout fails. You could also use a stop a bit lower near some previous support at $10.05. I am looking for a sizeable spike higher by 10% or more if this stock can enter all-time high territory with strong volume.

Another stock that’s rapidly approaching a major breakout is MasterCard (MA), a global payments company that provides an economic link among financial institutions, businesses, merchants, cardholders and governments worldwide, enabling them to use electronic forms of payment instead of cash and checks. This stock is off to a slow start in 2012, with shares off by around 5%.

If you look at the chart for MasterCard, you’ll notice that this stock recently broke below its 50-day moving average and traded down to a low of $336.26 a share. After hitting that low, the stock found some buying support and it has now trended higher towards its current price of around $354 a share. That rebound off the $336 area now puts MasterCard within range of trigging a major breakout.

Traders should keep an eye on MA for a breakout trade if this stock can manage to move above some near-term overhead resistance at $356 and its 50-day moving average of $359.45 a share on high-volume. Watch for volume to track in close to or well above its three-month average action of 1,047,890 shares. A sustained high-volume move or close above those levels should setup MA to trade back towards its December high of $381.16 a share, or possibly much higher.

If you’re bullish on MA, then I would look to be a buyer once it clears $356 and $359.45 a share with solid volume. If we get that action, I would simply use a mental stop that’s a few percentage points below $356 in case this breakout fails. Any close on high-volume above the 50-day at $359.45 should be considered very bullish for MA in the near-term.

Another stock that’s setting up for a big breakout is Celsion (CLSN), an oncology drug development company focused on the development of therapeutics for those suffering with difficult to treat forms of cancer. This is another stock off to a solid start in 2012, with shares up over 15%.

If you take a look at the chart for Celsion, you’ll see that this stock was hammered by the bears from its November high of $3.84 to a recent low of $1.64 a share. After tagging that low last month, the stock has rebounded sharply and is now approaching a number of key breakout levels. What’s bullish about shares of Celsion here is that the stock is coming up on those breakout levels and the upside volume is tracking in strong.

Market players should now watch for CLSN to break out above some near-term overhead resistance at $1.95 to $1.99 a share, and its 50-day moving average of $2.01 a share on solid volume. Look for volume on a move above those levels that registers near or well above its three-month average action of 385,810 shares. At last check, CLSN has hit a high of $2.07 today, and the volume is already well above its average.

One could be a buyer of CLSN off any close above the 50-day that’s accompanied by strong volume. I would simply use a mental stop that’s right below $1.95 in case this breakout fails. If we do get that action either today or soon, then I would target a spike back towards some near-term resistance at $2.40 a share, or possibly its 200-day moving average of $2.83 a share.

Keep in mind that CLSN has a decent short interest since 9.1% of the tradable float is currently sold short by the bears. Any future breakout could easily spark a big short-squeeze as the bears cover some of their positions to avoid short-term losses.

At the time of publication, author had no positions in stocks mentioned.

Roberto Pedone, based out of Windermere, Fla., is an independent trader who focuses on stocks, options, futures, commodities and currencies. He is also an outside contributor to Beconequity.com and maintains the website Maddmoney.net, which he sold to Blue Wave Advisors in 2008. Roberto studied International Business at The Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany.